Barton v Malcolm Johns Legal Pty Ltd - [2015] FCA 166 - FCA 2015 case summary — Zoe

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Barton v Malcolm Johns Legal Pty Ltd

[2015] FCA 166

Federal Court of Australia|2015-03-06|Before: Gleeson J

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Source facts

Court

Federal Court of Australia

Decision date

2015-03-06

Before

Gleeson J

Source

Original judgment source is linked above.

Judgment (36 paragraphs)

[1]

Background to the appeal 6 There is a very long history of disputation and litigation that precedes this appeal, reaching back to as early as November 2000. MJL was Mr Barton's solicitor from about June 2009 until at least October 2012. During that time, Mr Barton borrowed substantial amounts to fund his involvement in litigation. There were several lenders including, it appears, clients or associates of MJL. 7 One action was a claim against Mr Barton in the Supreme Court of New South Wales ("Supreme Court") concerning the consequences of the discharge of mortgages securing loans of $450,000 made to Mr Barton. Mr Barton was unsuccessful in those proceedings: Dixon v Barton [2011] NSWSC 1525 ("Dixon"). In those proceedings, Mr Barton was represented by Mr Cotman SC and Mr Hyde of counsel. Ward J found that the mortgages had been discharged as a result of a mistake on the part of the plaintiffs' solicitor and that it was unconscionable for Mr Barton to seek to take advantage of the mistaken discharge of the mortgages. Her Honour made orders requiring, among other things, that Mr Barton execute mortgages to stand as security for the payment of the $450,000 together with interest and costs. 8 According to Mr Barton's first submissions, in July 2013, Roberts Fund Pty Ltd ("Roberts Fund") commenced proceedings in the Supreme Court seeking relief against several parties including Mr Barton ("Roberts Fund proceeding"). The orders sought include an order for a judicial sale of Mr Barton's property. Documents tendered by Mr Barton in the FCC (including his cross claim, referred to below) suggest that Roberts Fund is one of the clients of MJL who lent money to Mr Barton. 9 Another client of MJL which appears to have lent money to Mr Barton was the estate of the late Edith Welsh ("Welsh estate"). In August 2013 Malcolm Johns (the principal of MJL), acting in his capacity as trustee of the Welsh estate filed a cross claim in the Roberts Fund proceeding against Mr Barton seeking repayment of $180,000 plus interest pursuant to two mortgages dated, respectively, 5 November and 23 December 2010. 10 Mr Barton filed his defence in the Roberts Fund proceeding in September 2013, as well as his defence to the Welsh estate cross claim and his own cross claim ("Mr Barton's cross claim"). As least as subsequently amended, Mr Barton's cross claim seeks relief against numerous parties including Mr Johns and MJL. 11 In February 2014, Mr Barton filed an amended cross claim in the Roberts Fund proceeding. In that document, Mr Barton made serious allegations against MJL and Mr Johns including that MJL breached its fiduciary duties to Mr Barton. The precise alleged breaches are difficult to identify but appear to encompass procuring Mr Barton to borrow money from clients of MJL or Mr Johns, inducing Mr Barton to incur legal costs and misappropriating monies borrowed by Mr Barton. 12 As noted above, the bankruptcy notice was issued on 19 February 2014 and, on 14 March 2014, Mr Barton's application to set aside the bankruptcy notice was dismissed. 13 On 20 March 2014, the creditor's petition was presented. 14 On 24 March 2014, Mr Barton applied for a review of the registrar's 14 March 2014 decision. He then filed a notice stating grounds of opposition to the creditor's petition on 24 April 2014. The FCC judge heard Mr Barton's various applications on 30 May 2014, and granted leave to Mr Barton to seek a review of the registrar's decision out of time. 15 On 12 June 2014, in the Supreme Court, Young AJ struck out Mr Barton's cross claim in the Roberts Fund proceeding, but granted him leave to replead. The Court was not provided with Young JA's reasons for his decision, but, having regard to rule 14.28 of the Uniform Civil Procedure Rules 2005 (NSW), I infer that his Honour probably concluded, as drafted, the cross claim disclosed no reasonable cause of action; or had a tendency to cause prejudice, embarrassment or delay in the proceedings. 16 The mere fact that Mr Barton was given leave to re-plead does not demonstrate that he has a fair chance of success or a prima facie case on the cross claim.

[2]

Judgment debt 17 The judgment debt relates to unpaid counsel fees rendered by Mr Cotman SC and Mr Hyde. The FCC judge found that the counsel's fees were incurred in connection with a possible appeal against the decision in Dixon. Mr Barton confirmed this at the hearing of the appeal. 18 According to Mr Barton's first submissions, the costs were incurred (or allegedly incurred) pursuant to a costs agreement dated 19 September 2011. 19 MJL commenced the Local Court proceedings which gave rise to the judgment debt in September 2013. Mr Barton's defence to the Local Court proceedings was struck out in his absence on 16 January 2014. On that occasion, MJL's application for summary judgment was listed for hearing on 13 February 2014. 20 On 7 February 2014, Pembroke J in the Supreme Court refused an application by Mr Barton to remove the Local Court proceedings to the Supreme Court to join them with the Roberts Fund proceeding. The transcript of the hearing before Pembroke J shows that his Honour formed the view that, rather than permit the transfer, it would be more convenient to leave Mr Barton to his right to apply for a stay of any judgment made in the Local Court. Mr Johnson, appearing for MJL and Malcolm Johns said to Pembroke J, in response to the suggestion that this might be the more convenient approach: Yes, that is exactly our position and we would make it clear that obviously any judgment wouldn't be treated as to preclude him maintaining any cross-claim in the Supreme Court. 21 After hearing from Mr Barton about his application to have the Local Court proceedings addressed with the Roberts Fund proceeding, Pembroke J said: So I just think that that is one clear matter which, having started regularly in the Local Court, should remain there and should be determined there and if, for some reason on closer inspection, once there is a judgment against you, if that is to happen, there is a reasonable argument that the judgment should be stayed until you can have determined your various money claims against Malcolm Johns' firm and the many other cross-defendants, they you can apply. But at the moment I don't see the justice in transferring the Local Court proceedings to the Supreme Court and holding up the resolution of that rather simple claim pursuant to the costs agreement, for counsel's fees. 22 When asked by Pembroke J whether Mr Barton had a substantive defence to the Local Court claim, Mr Barton referred to his cross claim. Pembroke J then said: I'm not going to decide today whether they are sufficient for a defence. The magistrate will do that, if that is what you rely upon, but it doesn't seem to me at first blush that they amount to a defence. You might have a cross-claim, which is different from a defence, which is why I say to you that if a judgment is given against you for $26,000, you may be able to say "Well, I want a stay of the judgment while I prosecute my claim for damages for a greater amount than the $26,000". I think, for that reason Mr Barton, I propose to refuse the application for transfer… 23 On 13 February 2014, MJL obtained summary judgment against Mr Barton for the judgment debt. 24 Mr Barton's notice of appeal indicates that he filed an application for a stay of the judgment debt on 13 February 2014, that is, before the bankruptcy notice was issued, but that the application had to be re-lodged on 6 March 2014 due to an "administrative bungle". From an affidavit sworn by Mr Barton on 6 March 2014 in the Local Court proceedings, it appears that he sent a notice of motion to the Local Court dated 25 February 2014, which was received by the Local Court Registry on 26 February 2014. The notice of motion sought a stay of enforcement of summary judgment entered on 17 February 2014 until determination of Mr Barton's cross claim in the Roberts Fund proceeding. 25 On 27 February 2014, a registrar of the Local Court rejected the notice of motion for the following reasons: (1) Your Applications to Postpone pay of the Filing Fee & Transcript Fee is [sic] this Matter Has been Refused. (2) Accordingly your Notice of Motion is Rejected under Rule 4.10 UCPR. A filing fee of $78:00 is payable for the lodgement of this Notice of Motion. (3) However note for your Motion to have any chance of success you or your legal representative would need to attend the hearing at this Court IN PERSON. (4) The Court also notes that you have field a Lever arch file of 26 Exhibits. The Rules require that you, as a mover of a motion, serve the Notice of Motion, the Affidavit & these Exhibits on the Respondent/Plaintiff. Accordingly you should file a copy of these Exhibits or at least retain a copy so that you can comply with the service requirements of Rule 18.2 Uniform Civil Procedure Rules, 2005. (5) It is also noted that you are shown as appearing in person at the hearing of the 13th February, 2014. Your attention is drawn to section 39 of the Local Court Act, 2007 which would seem to compel you to APPEAL TO THE SUPREME COURT against the decision of Magistrate O'Brien. Naturally you should seek legal advice before embarking on this course. 26 I was informed from the Bar table that Mr Barton's stay application includes an application to set aside the Local Court judgment which has not been determined. If this is correct, there must be some other stay application which was not in evidence before this Court. 27 On 17 April 2014, the Local Court judgment was stayed by that court until the expected hearing of an application in the Supreme Court to strike out Mr Barton's cross claim. 28 On 2 October 2014, a stay of enforcement of the Local Court judgment was "adjourned" until 20 November 2014.

[3]

Ground of opposition to the creditor's petition 29 Mr Barton raised the following grounds of opposition: 1. The Creditors petition is an abuse of process as in Shaw v MAB Corporation Pty Ltd [2013] FCA 1231 (22 November 2013) and Brunninghausen v Glvancies [1981] FCA 230 because ; - a. MJL is using the threat of bankruptcy as a means of debt collection to stymie my claims in SCNSW proceedings 2013/218863 - Roberts Fund Pty Ltd & Ors v NKD Barton & Ors b. MJL has acted unconscionably as found by Ward J on 12 December 2011 in [Dixon] at paragraph [189], [50] to [62] and [83] and [84] c. MJL acted a in a misleading and deceptive manner as detailed in the [cross claim] d. The indisputable fact remains that the claims in the Local Court were justiciable before the SCNSW. 2. Magistrate Buscombe in Local Court Matter 2013/259621 ordered a stay of enforcement of the summary judgment of Magistrate O'Brien on 17 April 2014. 3. [Mr Barton] sent to the Federal Court an Application for Review of Registrar Wall's orders of 18 March 2014, on 11 April 2014. 4. The Application for Review is dated 7 April 2014 and was returned to [Mr Barton] by letter dated 15 April 2014 by the Registry of the Federal Circuit Court because [Mr Barton] had filled in the wrong Fee Postponement Application. 5. The Application for Review has not been heard and the Orders are very likely to be set aside. 6. [Mr Barton] shall be solvent at the date of Hearing of the Creditors Petition 7. [MJL] engaged in misleading, deceptive and unconscionable conduct that resulted in the judgment of Magistrate O'Brien dated 18 February 2014 from which the Creditors Petition is founded. 8. The judgment of Magistrate O'Brien made on 18 February 2014 is liable to be set aside for the reasons that are in the Applicants reasons for Review to Registrar Wall's orders dated 7 April 2014. 9. The Petition should be set aside in the exercise of the discretion of the Court in the circumstances referred to in the Affidavit intended to be sworn on 23 April 2014 by [Mr Barton] in opposition to the Petition. 30 Paragraph 9 of the grounds of opposition appears to refer to an affidavit of Mr Barton dated 21 April 2014, but sworn on 23 April 2014. That affidavit refers to the following matters: (1) The decision of Ward J in Dixon and, in particular, the findings that MJL had acted unconscionably on Mr Barton's behalf; (2) On 28 February 2014, Mr Barton executed an affidavit that he sent to the FCC together with an "Application for Final and Interim Orders"; (3) On 3 March 2014, the time for compliance with the bankruptcy notice was extended to 18 March 2014; (4) On 6 March 2014, Mr Barton sent a notice of motion and affidavit to the Local Court, together with a cheque for filing fees. The notice of motion was set down for hearing on 17 April 2014; (5) On 18 March 2014, Mr Barton's application to set aside the bankruptcy notice was dismissed; (6) On 7 April 2014, Mr Barton sent to the FCC an application for review of the 18 March 2014 decision; (7) On about 15 April 2014, the application was returned because Mr Barton had completed the wrong form for a fee postponement application and because he had not applied for an extension of time; (8) On 17 April 2014, the Local Court judgment was stayed until 19 June 2014; (9) On 20 April 2014, Mr Barton asked MJL if it would consent to an adjournment of the creditor's petition for a time that does not appear from the affidavit. That request was refused by MJL.

[4]

Scope of appeal 31 The power to set aside a bankruptcy notice is not expressly stated in the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act") but is necessarily to be inferred and is within the general powers of the Court conferred by s 30(1): Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251 at 253 per Davies, Foster and O'Loughlin JJ. 32 It is a discretionary power. However, the Act confers no general discretion to set aside a bankruptcy notice that is valid in form and not an abuse of process: Re Briggs; Ex Parte Briggs v Deputy Commissioner of Taxation (1986) 12 FCR 310 at 311-312; Re Athans; Ex parte Athans (1991) 29 FCR 302 at 310; Australian Securities and Investments Commission v Forge [2003] FCAFC 274; (2003) 133 FCR 487 at [27]. 33 Similarly, the decision to make a sequestration order involves the exercise of discretion: see Bankruptcy Act, s 43. Importantly, by s 52(2), if the Court is satisfied by the debtor: (a) That he or she is able to pay his or her debts; or (b) That for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. 34 The FCC judge was required to exercise a discretion in making his decisions both to refuse to set aside the bankruptcy notice and to make the sequestration order: cf Clapham v Commonwealth Bank of Australia [2013] FCAFC 84 at [40]; Narain v Euroasia (Pacific) Pty Ltd [2010] FCA 1352 at [50]. Accordingly, the principles that apply to this appeal are the principles governing an appeal from an exercise of discretion, set out in the following well-known passage taken from House v R [1936] HCA 40; (1936) 55 CLR 499 at 504-505: The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred. 35 In Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384 at 391, Gibbs J said of a predecessor to s 52(2) of the Bankruptcy Act: The Court has a discretion to exercise; it is a wide discretion and must be exercised in the light of all the circumstances, not forgetting on the one hand that the petitioning creditor, if he has proved the existence of the debt and the act of bankruptcy, has what may be called a prima facie right to a sequestration order, and, on the other hand, that the fact that a majority in number and value of the creditors desires an administration under the deed is a matter to be considered, and is an important matter if the majority is substantial. Finally, however, the Court has to decide in what manner the discretion should be exercised in all the circumstances of the particular case, having regard to the interests of the various parties and the interest of the public.

[8]

Ground 5 42 This ground of appeal was not explicitly addressed by Mr Barton in either written or oral submissions. In full, it reads: His Honour erred in deciding or in effect deciding that: a. S 91 of the Evidence Act 1995 precluded reliance by [Mr Barton] in the bankruptcy proceedings upon factual findings of unconscionable conduct on the part of or imputable to [MJL] whilst [MJL] was representing [Mr Barton] before Ward J in [Dixon]; b. There was any res judicata or issue estoppel to that effect; and/or c. [Mr Barton] was obliged or indeed was able (given the fact that [MJL] was not a party in those proceedings) to agitate such a matter against his own Solicitor whilst [MJL] was representing [Mr Barton] in the Proceedings before Ward J. 43 The relevant paragraphs of the FCC judge's reasons appear in his Honour's consideration of Mr Barton's opposition to the creditor's petition. They are: [21]…As to the assertion that MJL acted unconscionably, Barton is unable to rely on what he described as findings made by Ward J in one of the several cases forming part of the background matrix to this case due to s 91 of the Evidence Act 1995: Exclusion of evidence of judgments and convictions (1) Evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding. (2) Evidence that, under this Part, is not admissible to prove the existence of a fact may not be used to prove that fact even if it is relevant for another purpose. [22] In any event, the court expresses its doubts as to whether what Ward J said supports Barton's contention. Barton further asserts, as part of his abuse of process claim, that MJL acted in a misleading and deceptive manner. These are matters that could have been argued at the time the judgment was obtained against Barton, and he provides no explanation as to why he did not do so.… 44 Paragraph 5b of the Notice of Appeal does not accurately describe the FCC judge's reasons. His Honour did not find any res judicata or issue estoppel: to the contrary, he explained that Ward J's findings were not binding on the parties in the bankruptcy proceeding. Paragraph 5c of the Notice of Appeal misunderstands his Honour's reasons: his Honour said that there was no explanation for why Mr Barton did not raise the alleged misconduct of MJL in the Local Court, not in the proceedings before Ward J. 45 As to paragraph 5a, the question of Mr Johns' authority to act on Mr Barton's behalf in connection with the acts by which Mr Barton was found to have acted unconscionably was not an issue in the proceeding before Ward J. Accordingly s 91(1) of the Evidence Act 1995 (Cth) does not have a relevant operation. However, s 91(2) prevents the tender of Ward J's findings to prove facts as to the conduct her Honour found was unconscionable in the bankruptcy proceeding: Ainsworth v Burden [2005] NSWCA 174 at [109] (Hunt AJA, Handley and McColl JJA agreeing). 46 The notice of opposition to the creditor's petition identifies the relevant paragraphs of Ward J's reasons as [189], [50] to [62], [83] and [84]. I have read those paragraphs. Even if they were admissible, they do not advance any case that might be put by Mr Barton against MJL in the absence of evidence that Mr Johns was not acting in accordance with instructions or with Mr Barton's authority. At the hearing of the appeal, Mr Barton asserted from the Bar table that Mr Johns acted without his instructions in relation to conduct found to have been unconscionable and also that he did not instruct Mr Johns to act unconscionably. Those assertions were not evidence in the appeal and the respondent did not have the opportunity of cross-examining Mr Barton on them. In any event, their credence would need to be assessed with matters that include the fact that Mr Barton gave instructions to file an appeal from the decision of Ward J. 47 It follows that no appellable error is identified by ground 5 of the Notice of Appeal. 48 In the context of other grounds of appeal, it will be necessary to consider the separate question whether Mr Barton identified a sufficient basis for a counter-claim, set off or cross demand against MJL based on contentions to the effect that Mr Johns acted contrary to Mr Barton's instructions or interests.

[13]

FCC judge's reasons 54 The FCC judge identified Mr Barton's case as being based on the contentions that the bankruptcy notice is an abuse of process and also that he has a "counter-claim, set off or cross-demand" within s 40(1)(g) of the Bankruptcy Act. Section 40(1)(g) refers to "a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained". 55 He noted that Mr Barton made the following contentions: (a) That he could not reconcile the legal fees and interest incurred against monies advanced to him by or through Mr Johns; (b) That he believed MJL was negligent; and (c) He did not know whether the counsel's fees the subject of the judgment debt had been paid. 56 The FCC judge noted that Mr Barton's lenders were seeking to recover amounts advanced to him and referred to his cross claim in the Roberts Fund proceeding, which he described as "extensive" and "complex". 57 As to whether the bankruptcy notice is an abuse of process, the FCC judge observed that that Mr Barton did not give evidence or make submissions that he was solvent. To the contrary, there was reason to doubt Mr Barton's solvency because he had applied to the Court for a remission of fees and he had told the Court that his farming property was valueless and unsaleable. The FCC judge concluded that Mr Barton's argument as to abuse of process was that the, or a, real purpose of the bankruptcy notice was to stymie his cross claim in the Roberts Fund proceeding. 58 The FCC judge found that Mr Barton had not discharged his onus of proof as to the purpose of the bankruptcy notice. He found that no improper purpose or abuse of process was discernible on the evidence and there was no attempt at extortion. He also noted that the debt was not substantial, that it appeared to have been incurred on Mr Barton's instructions and that the Local Court judgment had not been set aside. 59 As to the alleged counter-claim set off or cross demand, the FCC judge was not satisfied that Mr Barton had a "fair chance of success or prima facie case", citing Re Gould; Ex parte Skinner (1983) 72 FLR 393 and Ebert v Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346. The FCC judge said: [Mr Barton] has literally flooded the Court with documents in evidence containing claims that have no evidence to support them, and which paints a somewhat sorry history of what turned out to be unsuccessful litigation, during which Barton accumulated a very substantial liability for legal fees. 60 The primary judge stated that, despite the volume of material before him, he was not satisfied that the Mr Barton had a fair chance of success of prima facie case. He observed that the "mere production of a cross-claim alleging facts which, if true, might give rise to such a claim will be insufficient to satisfy the court". 61 The primary judge concluded that there was no counter-claim set off or cross demand within paragraph 40(1)(g) of the Bankruptcy Act.

[17]

Alleged misappropriation of trust funds 68 I have considered the evidence identified in Mr Barton's first submissions, which referred to the following matters: (a) In late March 2011, Mr Johns borrowed $150,000 from the Larden-Smiths, who were clients of Mr Johns; (b) On 4 April 2011 Mr Johns sent Mr Barton an email saying that "we have to pay $50,000 back to the Welsh Estate which I will pay out of the balance of $52,080.48"; (c) The amount of $52,080.48 was the amount remaining from the loan of $150,000 after certain other payments were made; (d) Mr Johns as trustee of the Welsh estate filed a cross claim in the Roberts Fund proceeding against Mr Barton claimed an amount of $180,000, and made no reference to the repayment of $50,000; (e) By email dated 15 September 2011, Mr Jones told Mr Barton that Roberts Fund had agreed to increase its loan to him, and that the additional funds should be applied to various debts including an amount of $6,000 for a surveyor; (f) There was a variation of a mortgage to reflect the increased loan from Roberts Fund; (g) In October 2012, Mr Barton received a bankruptcy notice "as the surveyor…had not been paid the $6,000"; (h) On 12 October 2012, Mr Barton "had issued a bank cheque for $8,684.88…in payment for survey work on the Nanima subdivision land pursuant to the invoice issued prior to 15 September 2011". 69 The available evidence is consistent with the possibility that Mr Johns or MJL misappropriated the amounts of $50,000 and $6,000. However, in my view, it is at least equally possible that the amounts were retained in the MJL trust account and used to pay other debts owed by Mr Barton. In this regard, Mr Barton's signed directions as to payment did not authorise the transfer of the $50,000. The evidence did not include any direction as to payment of the additional loan funds advanced by Roberts Fund. I was not taken to any evidence that the $56,000 was in fact transferred out of the trust account. A further possibility is that the repayment of $50,000 can be proved as a defence to the claim of $180,000. 70 In my view, none of this evidence reveals any error on the part of the primary judge in failing to identify a relevant counter-claim in respect of which Mr Barton has a fair chance of success or a prima facie case.

[18]

Alleged misrepresentations concerning $1.5 million funding 71 In his written submissions, Mr Barton summarised his claim to be that Mr Johns led him to believe that Mr Smits could and would guarantee a loan to be provided by a Malaysian private lender known to Mr Smits. The cross claim contains an allegation that Mr Johns induced Mr Barton "by making false and misleading representations to sign the Smits Deed dated 25 January 2011 and to leave or fix [Mr Barton] with a purported debt of $400,000 to Mr Smits". 72 The materials provided to the FCC show that in late December and early January 2011 Mr Barton was trying to borrow money to settle litigation. By email dated 13 January 2011, Mr Barton wrote to Mr Johns saying "you have my instructions to offer $450K to settle all matters". It seems that when Mr Barton gave those instructions he did not have $450,000 readily available to him. By email dated 24 January 2011, Mr Johns wrote to Mr Barton saying relevantly: Attached is the Deed Leo has sent me with advice that he believes he has a private lender who will do the funding for you. You will see that there are blanks in Recital B as some of the figures are not presently known although all up the figure is expected to be about $1.5m. … Quite frankly, if you can't get the money via Leo (and supported by his guarantee if required) I have no idea where you will get it and it is very probable that it will be all over for you. This cannot be allowed to happen. Leo requires you to execute the attached Deed and return it as soon as possible. As Leo is also a client of my Firm, you must take independent legal advice from say Ms Conn who should also witness the Deed. 73 There is a signed deed of settlement dated 25 January 2011 between Mr Barton and Mr Smits which records relevantly: RECITALS A. Barton is the registered proprietor of Lot 2 on Folio Identifier 806578 ("Nanima") B. Barton requires loan finance of approximately $1.5m to pay or settle the following debts: (1) $450,000 to the assignees of the former first mortgagee over Nanima within approximately two months. (2) $480,000 to Malcolm Johns & Company, Solicitors; (3) $400,000 to Smits. (4) an amount to the funder for one year's interest in advance and costs. C. Barton intends to create a rural residential subdivision on approximately 70 designated acres of Nanima. D. Smits is a property developer with contacts in the finance industry, who is willing to assist Barton in finalising the above matters upon the terms and conditions recorded below. NOW THIS DEED WITNESSETH: 1. Smits will arrange all necessary loan applications for Barton to pay or settle the said debts on first mortgagee security over Nanima and will, if required, by the lender guarantee repayment of the loans. 2. Smits will be manager with supervisory control of the said residential subdivision for a fee equivalent to 10% of the gross revenue derived or received by or for and behalf of Barton in respect of the said development. 3. Barton hereby irrevocably and absolutely authorises and directs payment of the said debts out of any loan funds arranged on security of a mortgage over Nanima. 4. This Deed shall enure for the benefit of and bind the respective successors and assigns of Barton and Smits and is intended to benefit each creditor referred to above. 5. Barton shall take and execute all necessary actions, steps, proceedings and documents and provide full facilitation and assistance to Smits as and when reasonably, relevantly and lawfully requested by Smits to give full force and effect to the spirit, terms and objects of and incidental to this Deed. 6. Smits undertakes to keep confidential all documents and information provided to him except for the proper performance of his functions, obligations and responsibilities under this Deed. 7. Performance and interpretation of this Deed shall be governed by the laws then in force in New South Wales. 8. This Deed can be executed by facsimile, emails or on copy counterparty. 74 An email from Mr Johns to Mr Barton on 27 January 2011 records that Mr Smits had executed the deed and says "Fingers now crossed that he arranges the funding". An email from Mr Barton to Mr Smits on the evening of 27 January 2011 asks "Please advise if you require any further information to secure funding". 75 These materials (which tend to contradict Mr Barton's allegations) and the absence of any evidence supporting Mr Barton's claim indicate that it was open to the primary judge to conclude that Mr Barton has no case against MJL which is proper and reasonable to litigate on this aspect of his claim.

[20]

Alleged breaches of fiduciary duty and breaches of Legal Profession Act 78 Mr Barton says that Mr Johns persuaded him to lodge an appeal against Ward J's decision in Dixon. The appeal was ultimately withdrawn but Mr Barton estimates that he spent over $180,000 in legal costs on the appeal. Mr Barton also claims that Mr Johns caused him to litigate the proceedings heard by Ward J to protect Mr Johns' clients who had loaned money to Mr Barton and not the interests of Mr Barton. Ward J's decision arose out of conduct following a settlement of claims in both the Supreme Court of New South Wales and the Supreme Court of Queensland and a "Deed of Terms of Settlement" dated 27 May 2011 (see [34] of Ward J's reasons). By that time, MJL had been Mr Barton's solicitor for at least two years, apparently in relation to these claims. In October 2009, Mr Jones sent an email to Mr Barton saying that he was "still trying to arrange litigation funding" for Mr Barton. 79 The claim that Mr Barton was persuaded by Mr Johns to pursue litigation, particularly the matters that were determined by Ward J and the appeal that was eventually withdrawn is not supported by contemporaneous records or by evidence from any third party. Further, Mr Barton does not suggest that he was unaware of the possible interests of other clients of MJL in the proceeding. To the contrary, Mr Barton said: "As far as I was concerned, they were beneficiaries just as much - well, more so than me in the whole thing." Mr Barton did not point to any particular matter that the primary judge failed to take into account to reach his conclusion that there was no relevant prima facie case. I am not satisfied that the primary judge erred in his conclusion on this claim. 80 Mr Barton raised other matters for consideration, questioning how the counsels' fees the subject of the judgment debt could remain unpaid having regard to the funding that Mr Barton obtained through Mr Johns for the litigation. He complains that MJL did not obtain the results which they were supposed to achieve, and for which the firm was paid. Mr Barton also makes allegations concerning whether loans obtained through MJL were made in accordance with relevant legislation. Without more, none of these matters disclose any relevant error by the primary judge in reaching his conclusion that there was no relevant counter-claim, set off or cross demand in respect of which Mr Barton had a fair chance or any detectable chance of success.

[23]

Relevant law 82 A bankruptcy notice may be set aside if it is an abuse of process: Khouzame v All Seasons Air Pty Ltd [2014] FCA 1319 at [12]-[15], referring to Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260; Re Sterling; Ex parte Esanda Pty Ltd [1980] FCA 61; (1980) 30 ALR 77 and Re Lentini; Ex parte Lentini v CSR Ltd (1991) 29 FCR 363. 83 In Rogers v R [1994] HCA 42; (1994) 181 CLR 251 at 286, McHugh J said: Inherent in every court of justice is the power to prevent its procedures being abused [Hunter v Chief Constable of the West Midlands Police [1982] AC 529, at 536]. Although the categories of abuse of procedure remain open, abuses of procedure usually fall into one of three categories: (1) the court's procedures are invoked for an illegitimate purpose; (2) the use of the court's procedures is unjustifiably oppressive to one of the parties; or (3) the use of the court's procedures would bring the administration of justice into disrepute. See also Batistatos v Roads & Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256 at [15], PNJ v R [2009] HCA 6; (2006) 252 ALR 612 at [3] and Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 244 CLR 427 at [89]. 84 A claim of abuse of process imposes a heavy onus of proof on the person alleging the abuse: Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509, 529. 85 If it is apparent that the purpose of a bankruptcy notice is to put pressure on a debtor to pay a debt rather than to invoke the Court's insolvency jurisdiction, then the filing of the bankruptcy notice is itself an abuse of process: Brunninghausen v Glavanics [1998] FCA 230. In that case, it was common ground between the parties that the debtor was appealing from the judgment that founded the bankruptcy notice and that the appeal was arguable and neither frivolous or vexatious. There was evidence as to the debtor's financial position which included assets substantially exceeding the judgment debt, and evidence that the debtor had offered security for payment of a substantial portion of the judgment, in the event that the appeal did not succeed. This is a very different factual context from the case before the primary judge. 86 In Shaw v MAB Corporation Pty Ltd [2013] FCA 1231, one aspect of the appellant's case was that the creditors used the threat of bankruptcy as an instrument of duress and as a means of debt collection when they did not have a reasonable belief that the debtor could be insolvent. That is also a different case from this one, in that there was no evidence before the primary judge to suggest that MJL did not have a reasonable belief that Mr Barton could be insolvent. 87 In Killoran v Duncan [1999] FCA 1574 Gyles J referred to the significance of the solvency position of a debtor in deciding whether to grant relief in respect of a prima facie abuse of process saying (at paragraph 14): It would be most unfortunate if a bankruptcy notice were set aside in circumstances where the debtor is in fact insolvent.

[24]

Consideration 88 In his Notice of Appeal, Mr Barton asserted that the bankruptcy proceedings were being used as a means of stymying or defeating his prosecution his cross claim against MJL in the Roberts Fund proceeding. Since that cross claim has been struck out, I interpret Mr Barton's argument to include the wider purpose of stymying or defeating any prosecution by Mr Barton of such claims as might be made against MJL in the Roberts Fund proceeding. 89 In his written submissions, Mr Barton identified both the Local Court proceedings and the bankruptcy notice as relevant abuses of process. The basis for this submission was not clearly identified (Mr Barton referred to "the abovementioned reasons"), but appeared to be the matters relied upon to assert the existence of a cross claim against MJL together with facts concerning Mr Barton's unsuccessful efforts to obtain relief against MJL. 90 In his second set of submissions, Mr Barton put several matters in support of the proposition that there is no debt underlying the Local Court judgment. This was not one of the grounds raised in the notice of opposition to the creditor's petition. According to the FCC judge's reasons, Mr Barton did not make such a submission before the FCC. Rather, Mr Barton "simply did not know whether Counsel's fees had been paid or not". 91 Save in the most exceptional circumstances, a party will not be allowed to raise a new issue on appeal where, had the issue been raised at trial, evidence could have been given which may have presented the argument sought to be put from succeeding: Suttor v Gundowda [1950] HCA 35; (1950) 81 CLR 418; Dynamic Hearing Pty Ltd v Poliaris Communications Pty Ltd [2010] FCAFC 135; (2011) 273 ALR 696 at [143]; Minister of State for Home Affairs v Siam Polyethylene Co Ltd (No 2) [2010] FCAFC 106 at [20]. The question of whether there is a debt underlying the Local Court judgment is plainly a matter that could have been addressed by evidence before the FCC, had it been raised by Mr Barton. Accordingly, Mr Barton may not raise it in his submissions in reply. 92 In my view, the FCC judge did not err in finding that the bankruptcy notice did not involve an abuse of process. Mr Barton did not identify any evidence that the respondent was not seeking genuinely to invoke the FCC's jurisdiction, or that it was seeking to apply undue pressure to Mr Barton. There is no evidence that MJL did not act appropriately in obtaining the Local Court judgment. To the contrary, it appears that Mr Barton was present in Court when the judgment was given. Although as a practical matter, it is reasonable to suppose that Mr Barton's bankruptcy is likely to have the benefit to MJL that Mr Barton will be prevented from pursuing his cross claim in the Roberts Fund proceeding, that does not mean that MJL is not genuinely seeking to invoke the Court's insolvency jurisdiction: cf Commonwealth Bank v Pattison [2012] FCA 1397 at [46]. 93 There was no reason for the FCC judge to conclude that the issue of the bankruptcy notice fell within any of the usual categories of abuse of process. 94 Accordingly, ground 6 of the Notice of Appeal fails insofar as it concerned the application to set aside the bankruptcy notice.

[26]

FCC judge's reasons 97 At paragraph 20 of his reasons, the FCC judge summarised Mr Barton's arguments as follows: (a) The creditor's petition is an abuse of process; (b) The underlying judgment was stayed; (c) The application to set aside the bankruptcy notice had not yet been dealt with; (d) He would be solvent at the date of the hearing of the creditor's petition; (e) MJL had engaged in misleading, deceptive and unconscionable conduct which resulted in the Local Court judgment, which should therefore be set aside; (f) The Court should otherwise exercise its discretion not to make the sequestration order. 98 The FCC judge concluded that his reasons for rejecting the argument that the bankruptcy notice was an abuse of process applied equally to the creditor's petition. 99 He decided that Mr Barton was not able to rely on findings made by Ward J to the effect that MJL had acted unconscionably but, in any event, doubted that the relevant findings supported Mr Barton's contention. 100 As to the contention that MJL acted in a misleading and deceptive manner, the FCC judge found that this matter could have been argued by Mr Barton when the judgment was obtained against him in the Local Court. The FCC judge also referred to an argument about the justiciability of the Local Court claim which was not agitated on this appeal. 101 As to the stay of the Local Court judgment, the FCC judge noted that the judgment had not been set aside and was not the subject of an appeal. He also noted that the stay was not an impediment to making a sequestration order if it was otherwise proper to do so, because the stay occurred well after service of the bankruptcy notice, citing Schekeloff v Hopkins Group Pty Ltd (1989) 22 FCR 407. 102 Concerning Mr Barton's claim of solvency, the FCC judge found that the only relevant evidence raised concerns that he was not solvent. 103 At paragraph 26, the FCC judge noted that Mr Barton had raised concerns about the Local Court proceedings. He found that any such concerns may provide a basis for applying to set aside the Local Court judgment or appealing it, but neither step had been taken. 104 As to the contention that the FCC should exercise its discretion to dismiss the creditor's petition, the FCC judge found: (a) There was no basis for exercising the discretion in Mr Barton's favour; (b) Mr Barton had not established his solvency; (c) There was no element of abuse of process or ulterior motive established on the evidence; (d) On the contrary, "the impression formed from all of the evidence…is that [Mr Barton] borrowed significant sums of money to fund litigation that was unsuccessful, and he would prefer not to pay his lenders, one of whom is MJL. He appears to desire to shift responsibility for the consequences of choices he himself made. No 'other sufficient cause' has been established."

[27]

Relevant grounds of appeal 105 All of the grounds of appeal appear to relate to the FCC judge's decision not to dismiss the creditor's petition and, consequently, to make the sequestration order. To some extent, the issues are overlapping. In my view, the following issues arise from the Notice of Appeal in relation to this aspect of the FCC judge's decision: (1) Whether his Honour erred in failing to find that the creditor's petition was an abuse of process (ground 6); (2) Whether his Honour erred in failing to identify any of the following matters as "other sufficient cause" why a sequestration order should not have been made (grounds 3 and 4): (a) The cross claims identified in in the cross claim in the Roberts Fund proceeding (ground 3(i) to (iii)); (b) The sequestration order would destroy the subject matter of the cross claims (ground 3(iv)); (c) The stay of the judgment in the Local Court, granted on 17 April 2014 (ground 3(v)); (d) The stay application in the Local Court was not heard until 17 April 2014 due to an "administrative bungle" in the Court registry (ground 3(vi)); (e) An appeal made from the decision of Pembroke J in the Supreme Court not to remove the Local Court proceeding to be joined with the Roberts Fund proceeding, which appeal was scheduled for hearing in September 2014 (ground 3(vii)); (f) The FCC judge's finding that leave should be granted to review the registrar's decision to refuse Mr Barton's application to set aside the bankruptcy notice (ground 3(viii)); (g) The fact that the bankruptcy proceedings were being used "in abuse of process as a means of stymying or defeating" the claims that Mr Barton wishes to make in the Roberts Fund proceeding (ground 3(ix) and (x)); (h) The "futility" of the bankruptcy (ground 3(xi)); (i) Mr Barton is entitled to restitution as a result of the illegality of loan securities as a result of the respondent's non-compliance with ss 477 and 479 of the Legal Practitioners Act 2005 (NSW) [sic] (ground 3(xii)); (j) The matters stated in the grounds of opposition to the creditor's petition (ground 3(xiii). These matters are set out above. (3) Whether his Honour erred in failing to dismiss the creditor's petition on the grounds that the Local Court judgment was not a substantial one and was quite likely to be negated or offset by the cross demands identified in the cross claim in the Roberts Fund proceeding (grounds 1, 2 and 7).

[29]

Grounds 3 and 4 of the notice of appeal: "other sufficient cause" why a sequestration order should not have been made 108 A petitioning creditor who has satisfied the requirements of s 52(1) of the Bankruptcy Act is prima facie entitled to a sequestration order: Cain v Whyte [1932] HCA 6; (1933) 48 CLR 639 at 645-6. 109 Mr Barton identified 10 separate matters in his Notice of Appeal as "sufficient" cause why the FCC judge should not have made the sequestration order. He did not submit that the FCC judge has misunderstood the legal principles relevant to whether there is "other sufficient cause" why a sequestration order should not be made. 110 In Clapham v Commonwealth Bank of Australia [2013] FCAFC 84 (at [54]), a Full Court noted the width of the discretion conferred by s 52(2)(b) and identified the relevant principles governing the exercise of the discretion as follows: 1. A petitioning creditor who has satisfied the requirement of s 52(1) of the Act is prima facie entitled to a sequestration order (Cain v Whyte [1932] HCA 6; (1933) 48 CLR 639 at 645-646; Rozenbes v Kronhill [1956] HCA 65; (1956) 95 CLR 407 at 414). But if the debtor satisfies the Court that he or she has a real claim against the petitioning creditor that is likely to succeed for an amount that is equal to or in excess of the amount owing to the creditor then the Court may decline to make a sequestration order, and make an order adjourning or dismissing the creditor's petition (Re Schmidt; Ex Parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116 (Gibbs J)). 2. If the claim relied upon by the debtor as providing sufficient cause to adjourn or dismiss the petition is for unliquidated damages then it will usually be appropriate to consider whether the debtor's claim has sufficient merit to justify either the adjournment or the dismissal of the creditor's petition (Re Schmidt, ibid). If the Court is satisfied that the debtor has a real claim, but is unable to be satisfied that the claim is one likely to succeed, then it may be more appropriate to adjourn the creditor's petition in order to give the debtor an opportunity to fully litigate his or her claim (Re James; Ex Parte Carter Holt Harvey Roofing (Aust) Pty Ltd (No 2) (1994) 51 FCR 14 at 22 (Olney J)). But there may be cases in which the Court may still decide to dismiss the creditor's petition even though it is not satisfied that the debtor's claim will most likely succeed. 3. When considering the merit of the debtor's claim, the Court does not usually do so as it would at trial. This is especially so if the claim is likely to give rise to issues of credit. The Court instead assesses the merit of the debtor's claim, both in relation to liability and quantum, in light of the available material and the progress that the claim has made, if any, toward a trial. 4. Apart from the interests of the petitioning creditor and the debtor, the Court should also consider the interests of any other creditors, and the public generally, arising out of the debtor's insolvency (Re Svir; Ex parte Commissioner of Taxation [1998] FCA 503; (1998) 83 FCR 314 at 317 (Burchett J)). However, it may not be in the creditor's interest or, more generally, the public interest, to make a sequestration order in circumstances where the debtor's insolvency is likely to be of only short duration (Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 74 FCR 19 at 26 (Davies, Wilcox and Branson JJ)). 111 In Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116, Gibbs J said: Where…the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decided such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition….If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order. 112 I am satisfied that none of the matters identified by Mr Barton indicate any appellable error by the FCC judge in reaching his conclusion that there was no sufficient cause why the sequestration order should not be made. In particular, (1) His Honour did not err in his assessment of the lack of strength of Mr Barton's cross claim; (2) Accordingly, the possible frustration of the prosecution of Mr Barton's cross claim was not a matter to be accorded substantial weight; (3) The stay of the judgment in the Local Court, granted on 17 April 2014 did not require the FCC judge to conclude that there was "other sufficient cause", and nor did the fact that it might have been heard earlier but for the fact that the application was first rejected in the circumstances set out above; (4) The same applies to the appeal brought from the decision of Pembroke J in the Supreme Court not to remove the Local Court proceeding to be joined with the Roberts Fund proceeding; (5) The same applies to the FCC judge's finding that leave should be granted to review the registrar's decision to refuse Mr Barton's application to set aside the bankruptcy notice, particularly where his Honour ultimately concluded that the bankruptcy notice should not be set aside; (6) The claim that the proceedings were an abuse of process was properly rejected and therefore did not amount to "other sufficient cause"; (7) There was no reason to find that the bankruptcy would be futile; (8) Mr Barton did not adduce evidence supporting a conclusion that he was entitled to restitution as a result of the illegality of loan securities as a result of the MJL's compliance with professional standards legislation; (9) As to the matters stated in the grounds of opposition to the creditor's petition, most of them overlap with matters already addressed. To the extent that they do not, none of them required the FCC judge to reach a different conclusion. 113 Accordingly, these grounds of appeal fail.

[34]

Other matters 117 In his second submissions, the applicant submitted that the FCC judge did not evaluate the evidence before him. I do not accept that submission. At the hearing, the FCC judge concluded by assuring Mr Barton that he would read all the material and consider the arguments referred to, including both oral and affidavit evidence. There is no evidence that he did not do so. 118 In his oral submissions, Mr Barton referred to the contentions of the appellant in Rose v Meriton Apartments Pty Ltd [2012] FCA 844 at [18], being that the FCC judge in that case had: (1) Erred in misconceiving the discretion reposed in a court of bankruptcy in making a sequestration order under s 52 of the Bankruptcy Act; and (2) Erred in failing to take into account, in the exercise of that discretion, the fact that the making of the sequestration order would destroy the subject matter of the proceedings between the parties in other jurisdictions. 119 The FCC judge explicitly recognised that he was asked to exercise his discretion in favour of Mr Barton. He concluded that there was no basis for doing so. As explained above, I am satisfied that the FCC judge did not make any appellable error in concluding that there was no basis for him to exercise that discretion. Accordingly, I reject the submission that the FCC judge misconceived his discretion. 120 As to the second matter raised by the appellant in Rose, at paragraph 32 of his reasons, Yates J observed that the contention as expressed incorporated a fundamental error in that the making of the sequestration order did not per se destroy the subject matter of other proceedings. In this case, the FCC judge plainly had in mind that a likely consequence of the sequestration order was that Mr Barton's cross claim would not be pursued by any trustee in bankruptcy. This appears from his observation at paragraph 18 of his reasons that: There is no question about the extent of [Mr Barton's] commitment and emotional attachment to the cross-claim, but just as there is a legitimate interest of the public in stopping unremunerative trading (Thomas v Nask [2011] FMCA 661, applying Cain v Whyte (1993) 48 CLR 693 at 646), there is a legitimate interest of the public in stopping litigation that improperly hinders the legitimate rights of creditors as well as drains the public purse.

Parties

Applicant/Plaintiff:

Barton

Respondent/Defendant:

Malcolm Johns Legal Pty Ltd

Legislation Cited (6)

Legal Profession Act 2004(NSW)

Legal Practitioners Act 2005(NSW)

Bankruptcy Act 1966(Cth)

Evidence Act 1995(Cth)

Federal Court of Australia Act 1976(Cth)

Uniform Civil Procedure Rules 2005(NSW)

Cases Cited (61)

kins Group Pty Ltd (1989) 22 FCR 407 Shaw v MAB Corporation Pty Ltd [2013] FCA 1231 Suttor v Gundowda [1950] HCA 35; (1950) 81 CLR 418 Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157; (2002) 55 IPR 354 Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509

REASONS FOR JUDGMENT 1 This is an appeal from the decision of a judge of the Federal Circuit Court ("FCC") in which he: (1) dismissed an application by the appellant ("Mr Barton") for a review of the decision of a registrar of the FCC ("registrar") to dismiss Mr Barton's application to set aside a bankruptcy notice, and (2) made a sequestration order against Mr Barton's estate: Barton v Malcolm Johns Legal Pty Ltd [2014] FCCA 1287. 2 The bankruptcy notice was issued by the Official Receiver on 19 February 2014, based upon a judgment debt of $26,026.91 plus interest ("judgment debt") obtained by the respondent ("MJL") in the Local Court of New South Wales ("Local Court") on 13 February 2014. The sequestration order was made on the basis of a creditor's petition issued following Mr Barton's non-compliance with the bankruptcy notice. 3 The judgment debt remains unpaid. 4 Mr Barton appeals as of right from the judgment below: Federal Court of Australia Act 1976 (Cth), s 24. Pursuant to s 25(1AA) of that Act, the appellate jurisdiction of the Court in relation to an appeal from a judgment of the FCC is exercised in this case by a single judge. 5 Mr Barton appeared in person at the hearing of this appeal. In addition to his oral submissions, Mr Barton submitted two sets of written submissions, being submissions filed on 8 October 2014 ("first submissions") and submissions entitled "submissions in reply" dated 7 November 2014 ("second submissions").

[1994] HCA 42

[2011] FMCA 661

(2006) 226 CLR 256

(1994) 217 ALR 251

(1933) 48 CLR 639

(2011) 273 ALR 696

(1960) 104 CLR 346

(1980) 30 ALR 77

(2003) 198 ALR 331

(2000) 171 ALR 598

(1936) 55 CLR 499

(2011) 244 CLR 427